Energy economics: new series!

When the lockdowns from Covid faded away and the CDC ended mask mandates, we entered a new era.  We entered a post-Covid world.  The economy, too, began to look like something new and unfamiliar.  The primary feature so far appears to be very high inflation.  The inflation rate in the US hit over 8% by the beginning of 2022.  This was the highest it had been since inflation skyrocketed in the early 1980s.

A bit of history...

As an economist interested in finance, energy, and history, this set off alarm bells.  Those last two major spikes in the table above were associated with periods of high oil prices.  This period is otherwise known as the 1970s energy crisis.  And for good reason.  In 1973, the countries supplying oil banded together to create OPEC and started an oil embargo in response to the Yom Kippur War.  Later, in 1979, the Iranian revolution did the same, reducing the supply of oil and dramatically raising prices worldwide.  Ultimately, these rises in energy prices skyrocketed the cost of living in the US, which relied heavily on cheap, plentiful oil supplies.

In response, the US Federal Reserve rapidly raised interest rates to slow the economy and reduce inflation.

This dramatically slowed the economy but also reduced inflation.  

...and back to the present

That lesson from history has been a crucial one in the economics discipline.  And today, history seems to be repeating itself a bit.  Given our current state of high inflation, the Federal Reserve has again aggressively pursued a policy of raising interest rates.  Debate has raged over exactly what is the cause of the high inflation and whether increased interest rates is the most effective way of reducing it.  Some say it's due to high corporate profits, some say excess consumer demand, some say excess government spending, others constrained supply chains.  What's clear is that the price of energy tracks very closely to the rise in consumer prices.  

Worsening this fact is the war in Ukraine limited Russian oil and gas from Europe, which then had to go to other markets to get natural gas.  Ultimately, those worried about inflation let a sigh of relief when Europe had a warmer than usual winter and China's consumer demand for energy lulled after flickering lockdown mandates.

The entire episode however raised a topic sometimes ignored in economics: energy matters.  Despite claims that we're approaching a new age, it's been something of a historical fact that growth has been tightly linked to energy consumption.  

And every country's access to a reliable supply of energy is crucial to their ongoing growth and the quality of life of their citizens.  Any break in that supply of energy can trigger a wave of social and political unrest, with protests related to fuel prices recently reaching 90 countries worldwide.

Conclusion

What does this mean for us and our future?  Certainly, relying upon foreign sources of energy is a double-edged sword.  Yes, increased globalization means greater regional specialization, greater coordination and cooperation between people from around a global, and, ideally, a more peaceful society of shared interests.  However, when times get tough and difficult decisions have to be made regarding who gets access to energy sources, cooperation can turn to accusations, trading can turn to hording, and local politics can get spiteful.  Most importantly, those who inhabit countries with the least power to provide cheap, plentiful energy are those who suffer the most, as they're struggle to provide themselves and their families with basic necessities.  And rising interest rates causing a slowdown in major developed countries may trigger slowdowns even more dramatic in countries relying upon a booming global economy to grow, have, and share more in our short lives.

Lastly, this moment raises the value of learning energy economics.  At present, I'm writing a book review on the history of coal (based on the book "Coal: A Human History" by Barbara Freese), summarizing the first edition of the landmark textbook on energy economics ("International Energy Markets" by Carol A. Dahl), and looking forward to attending the US Energy Economists Association annual meeting in Chicago later this year.

My hope is to learn and share what I've learned.  We are living in an incredibly fascinating moment in human history and (clean, transportable, storable, available, and accessible) energy is at the core of what we hope to achieve in our lifetimes and those that follow ours.